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United Still Can't Convince the World That Its Merger Worked

CHICAGO (
TheStreet) -- Three years after the 2010 merger between
United(UAL - Get Report) and
Continental, investors remain deeply uncertain about the combination's success.

That confusion was evident in the performance of United shares following Thursday's announcement that second-quarter earnings
gained 38% and per-share earnings matched consensus estimates. Shares opened Thursday at $35.07 and dipped as low as $33.03, down 5%, before starting a recovery that continued into Friday when shares rose 6%. The stock closed Friday at $36.25, up 5% for the week.

Among the positive signs are a year-to-date share price increase of 55% as well as a dramatic improvement this year in the airline's on-time performance, which suffered visibly in the summer of 2012. Yet doubts about United persist. In a note on Friday, JPMorgan analyst Jamie Baker reduced his third- and fourth-quarter estimates, yet raised his price target to $32.50 from $31.50.

"Lest anyone loses count, 2Q13 represents the ninth consecutive quarter of (year over year) earnings declines at United," Baker wrote. "Our concern remains that United has inadvertently stepped into the industry role once occupied by old
AMR(AAMRQ.PK), that of perennial disappointment and relative underperformance.

"We do expect United to potentially step out of this role sometime next year, as reflected by our current above-consensus 2014 forecast," he said. "That said, at similar multiple targets, shares in UAL leave significantly less room for upside potential, in our view," than
Delta(DAL - Get Report) and
US Airways(LCC).

Baker noted the US Airway/American merger team "chose to put the labor horse ahead of the merger cart as well as migrate their smaller IT platform into the larger one, the exact opposite of United-Continental." In other words, US Airways management learned from its early mistakes in the 2005 US Airways/America West merger. Perhaps that means the merger will avoid even more pitfalls as it moves forward.

Baker isn't the only analyst with a mixed impression of United. Deutsche Bank's Mike Linenberg said United's second-quarter operating margin was 8.2%, up 0.5% from a year earlier. "It was the first time since the March quarter of 2011 that the company has seen margin expansion (albeit modest,)" Linenberg wrote in a report, adding, "While we still think the company has a way to go to achieve what we would describe as strong results, this quarter clearly marks a step in the right direction." Linenberg has a buy recommendation and a $40 price target.